Wednesday, August 08, 2007

Interest Rates and Economic Management

Back in July, I predicted interest rate rises (so did many others)
I also discussed them in May - and there were tax cuts in the budget, just enough to pour even more money into the economy.

That the RBA has had to take such a blunt economic instrument, the first time in an election year, since its independence from government, and the 9th rise since 2002, is a serious blow to John Howard's claim of being a "good economic manager".

The Reserve Bank (RBA) uses monetary policy (interest rates) when fiscal policy (the budget) is ineffective, or having an adverse effect on the economy. Before the 2004 election, Peter Costello put a number of "electoral sweetener" options to Mr Howard. He wanted Mr Howard to use one. Mr Howard used not one, but all of the possible put to him by Peter Costello. The result was an EXTRA $6 Billion put into the economy. With an "average" multiplier effect of about 1.4-1.5 across the economy, the economy had to produce an extra $8.4-$9Billion worth of GDP. And that's before the $multi-Billion tax cuts; the mining boom; the housing boom; rising levels of personal debt.

No wonder there were 5 interest rate rises since the last election. The RBA had to slow spending somehow.

Have a look at:


Whatever spin is put on this by both the Coalition Government and Labor Opposition, the fact remains that the economy has become too strong; John Howard's government has been too loose with its "voter-pleasing" spending, and its budgets (fiscal policy) have not been as effective as they would have people believe.

With an election shortly, voters will be acutely aware of the hip-pocket effect of this latest rise, in particular.